Abstract

Extrinsic evidence regarding the negotiations surrounding an agreement may be relevant to determining the scope and meaning of the provisions, including whether a third party has standing to enforce the agreement as an intended third-party beneficiary under the agreement.

Background

Alter developed and patented more realistic depictions of hair, fur, and other natural elements for computer graphics and animation, and subsequently granted a limited license to Autodesk. Years later, Autodesk entered into a license and distribution agreement with Disney and announced that the agreement would enable Autodesk to make Disney’s XGen technology available to artists to create digital entertainment. Alter then sued Disney for patent infringement, and the parties ultimately settled, executing a license agreement that provided Disney the right to develop XGen and have it distributed by Autodesk.

The current lawsuit centered around Autodesk’s Maya products that use Disney’s XGen technology and code. Autodesk exclusively marketed and sold the Maya products and controlled its XGen technology and code. The XGen code could not be downloaded or sold separately from Autodesk’s Maya products. Autodesk claimed it had license to Alter’s patent based on the agreement between Alter and Disney.

The Autodesk Decision

Before considering various arguments, the Court first analyzed whether Autodesk was an intended third-party beneficiary of the Alter/Disney agreement so as to have standing to sue under the agreement. Under California law, a contract made expressly for the benefit of a third party, may be enforced by the third party at any time before the contracting parties rescind it. “A third party qualifies as a beneficiary under a contract if the parties intended to benefit the third party and the terms of the contract make that intent evident.” Because the language of the Alter/Disney agreement defined “Licensee Releasees” as including Disney’s customers and distributors, and Autodesk was both, Autodesk was considered a third-party beneficiary of the Alter/Disney agreement with standing to enforce it.

Alter argued Autodesk was not an intended beneficiary of the agreement because Autodesk was not named or addressed in the agreement. To support its argument, Alter relied on a prior Federal Circuit case where a customer of a party to an agreement argued it was an intended third-party beneficiary to the agreement. While the language of that agreement potentially covered the customer, the circumstances surrounding its execution undermined the customer’s argument. It became a customer to one of the parties after the relationship between the parties to the agreement ended, and its relationship with the party to the agreement was unrelated to the agreement.

The Court agreed that the current case had different facts and Autodesk was an intended third-party beneficiary that had standing to enforce the agreement. Autodesk’s relationship with Disney preceded the agreement, it was the announcement regarding the license between Disney and Autodesk that gave rise to Alter’s suit, and Disney repeatedly informed Alter that their agreement would need to cover Autodesk.

Convenant-Not-to-Sue

Alter next argued that the covenant-not-to-sue did not cover Autodesk and extended only to claims regarding work or services performed with respect to the “Licensed Products.” Autodesk argued that the covenant-not-to-sue protected it in two ways. It barred any claims against “Licensee Releasees” under the licensed patents, and it barred any claims arising out of or related to any products or services used or distributed by or for “Licensee Releasees.” The Court agreed that Alter’s claims against Autodesk fell within the scope of the covenant-not-to-sue and that the release provision covered Autodesk’s use and distribution of the accused product.

“For the Avoidance of Doubt”

The parties also disputed the effect of a phrase in the covenant stating that “For the avoidance of doubt, Licensor on its own behalf and on behalf of each of the Licensor Releasors agrees not to assert any claims against Licensee Releasees under the Licensed Patents for any claims of direct, indirect or contributory infringement, provided, however, Licensor reserves the right to assert claims against any third party end-user that is a direct infringer of the Licensed Patents other than with respect to the Licensed Products.”

Alter argued that the phrase “For the avoidance of doubt” meant to clarify the preceding sentences because the language of the agreement showed Alter entered into a broad covenant not to sue. The Court rejected this argument and also relied on extrinsic evidence regarding the negotiations between Alter and Disney to support its decision that the parties intended the covenant to cover Autodesk.

Release

The release provision applied to claims arising or related to the litigation between Disney and Alter or claims related to products or services used or distributed by or for “Licensee Releasees.” So Alter’s claims against Autodesk were released because (1) the products were distributed as of the effective date of the agreement and (2) the products were related to the litigation between Alter and Disney.

Strategy and Conclusion

Whether an entity who is not a party to a license agreement is an intended beneficiary to that agreement may depend not only on the language of the agreement, but also on the circumstances surrounding the negotiations leading to the agreement. In situations like this, it can be useful to maintain and submit records relating to such circumstances and the intent of the parties on who the agreement is intended to cover.